5Things to Watch in Bank of America’s Earnings

Bank of America Corp. looks to extend the good news for banks when it releases its second-quarter earnings report Wednesday morning. Citigroup Inc., J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. all beat earnings expectations this week. Here are five things to watch for as BofA unveils its results.

15 Jul 2014 12:04pm

By

Christina Rexrode

1The bargaining table

Bank of America has been negotiating with the Justice Department over how much it should have to pay to settle charges related to mortgage securities it sold before the financial crisis. The two sides remain far apart, with Bank of America offering some $12 billion but the DOJ demanding billions more. The settlement is closely watched in part because of its sheer size. A swing of $5 billion in the cash portion of the settlement, for example, could wipe out a whole quarter’s worth of revenue in the firm’s global wealth and investment management business.

$12 billion
The amount that Bank of America has reportedly offered to pay to settle charges related to mortgage securities.

2Waiting on the Fed

The bank in April had to suspend its plans to raise its quarterly dividend to five cents, and buy back up to $4 billion of its own shares, after discovering that it had been miscalculating capital levels. The bank submitted a new plan to the Federal Reserve in May, and The Wall Street Journal reported last week that the bank asked for the full 5-cent dividend plus a limited buyback, according to people familiar with the matter. The Fed has until about August 10 to decide whether to approve the request.

5¢
The dividend Bank of America reportedly requested from the Fed in its new capital plan.

3Familiar trends

The banking industry is expected to suffer continued declines in trading revenue and mortgage originations this quarter. New regulations are making it harder for banks to milk trading revenue, and sluggish volatility makes investors less likely to jump into the market anyway. On Monday, Citigroup reported that its trading business saw a less dramatic drop than some expected, heightening hopes for other banks’ trading business. Mortgage businesses, which have shrunk across the industry as the refinancing boom petered out, are likely to be another drag on results however.

Associated Press

4Simplify, simplify

Bank of America has been aggressively slimming down since the financial crisis, jettisoning units, selling branches and laying off employees. The bank has also benefited as it shrinks the unit that deals with problem mortgages, as those credit portfolios improve. The bank also recently introduced a new business strategy called Simplify & Improve, meant to further streamline product offerings and internal processes.

Bank of America has been aggressively slimming down since the financial crisis.

5The Legal Unpredictables

Legal expenses have been the bane of Bank of America’s earnings since the financial crisis, and investors will want to know what else might be lurking. When the bank set aside more money than expected for legal charges in the first quarter, driven partly by the expected Justice Department settlement, it pushed first-quarter results to a loss. Now, with the estimated size of a potential settlement drifting higher since last quarter, the bank’s investors will be watching closely whether more money will need to be set aside for that or other matters.